GAURAV RAJESH DESAI ,MUMBAI vs. ITO WARD -3(2), MUMBAI

The Ld. CIT(A) – (NFAC) erred in not providing proper & effective opportunity of hearing before deciding the matter.

Gaurav Rajesh Desai 5.3 I have duly considered the facts of the case, the issue raised by appellant vide these grounds of appeal, the findings of the AO in his assessment order on the issue of addition of Rs. 50,96,667/- and reply given by appellant during the appellate proceedings. From the perusal of assessment order, it is seen that the appellant had purchased along with two persons a piece of land at Kalyan bearing survey no. 89 vide registration document no 5927/2014 dated 28.08.2014 for the consideration of Rs. 10000000/- against the market value assessed at Rs. 6.87.49,000/- during the year under consideration. The AO noted that this transactions attracted the provision of section 56(2)(vii)(b) of IT Act and accordingly sought explanation for such discrepancies during the assessment proceeding. Since appellant had raised dispute against considering the market value of the immovable property. The AO referred the matter to the DVO (u/s 142A(1)) for arriving at the correct market value of the immovable property. On receipt of the DVO report, it was noticed that the DVO has assessed the market value of the land purchased by the appellant at Rs. 2,52,90,000/-against the actual purchase value of Rs. 10000000/-. In the light of the DVO report the AO has invoked the provision of sec. 56(2)(vii)(b) and has brought under tax 1/3rd share in the purchased land of the appellant which worked out to Rs. 50.96,667/- 5.4. The appellant has vehemently opposed the findings of the AO with regard to invocation of section 56(2)(vii)(b) and resultant addition of Rs. 50,96,667/- in his reply as seen from his submission as appearing in paragraph 4 above. From the reply, it is seen that appellant has prominently raised the issue that the purchased land is lease hold land which is not owned by the appellant. The market value of the land is actually Rs. 10000000/- as against Rs 2,52,90,000/- as assessed by the DVO. The appellant has argued that the DVO is not aware of the fact that land is lease hold and not the freehold land. Further he has not arrived correct valuation of the land based on the real situation on the ground. Similarly appellant has also argued that the invocation of sec. 56(2)(vii)(b) is not applicable for the year under consideration since land was purchased in 2014. The appellant has objected that DVO report on the ground that the assessment is excessive and not based on the real and ground situation. The appellant has also filed a report from his advocate with regard to valuation of land in support of his claim 5.5: I have duly considered the findings of the AD on the issue of addition u/s 56(2)(vii)(b) and reply of the appellant filed during appellate proceeding in support of his contention. From the careful analysis of the above facts, it is seen that AO has made due diligence with respect to assessment/ valuation of immovable property. The stamp valuation of the land Rs.6,67,49,000/- as evident from the registered documents. However, on objection received from the appellant, the AD had referred the matter to an expert (DVO) who is well qualified and authorised to assess the true valuation of the immovable property.

Gaurav Rajesh Desai The DVO after examining, all the factors involved in the valuation of the land, has assessed the market value of the land at Rs. 2.52.00.000 From the perusal of DVO report itself is evident that he was well aware of the nature and the character of land in question Therefore the valuation of the land by the DVO can't be questioned in my considered opinion, the assessment of the purchased land has been done correctly by the DVO. Hence the action of the AD by invoking section 56(2)(vii)(h) is valid and correct in view of the factual matrix of the present case. In The light of above discussion I am inclined to concur with the findings of AO in his assessment order with regard to addition of its 50.96.6671- made u/s 56(2)(vii)(b). Accordingly hereby sustain the addition of Rs. 50.96.667-made by AO in his assessment order. Therefore these Grounds of appeal are dismissed.”

4. The assessee is in appeal before us against the order of the CIT(A). There is a delay of 411 days in filing the appeal before us. The ld. AR in this regard filed a petition for condonation of delay along with affidavit from the assessee. The primary reason as stated by the assessee for the delay is that the assessee has not received any notices with regard to the appellate proceedings post 24.12.2020 and that the assessee has not received the order of the CIT(A) dated 16.10.2023 which is passed without issuing any notice of hearing. It is also stated in the affidavit that the assessee's representative has been appearing before the CIT(A) during manual proceedings and that the assessee has responded to the last of the notices post migration of the appeal to NFAC. It is also stated that only when the tax consultant visited the ITBA portal it is noticed that the CIT(A) has passed the order and thus it came to the knowledge of the assessee. Accordingly, the ld AR prayed that the delay be condoned since the delay in filing the appeal is not intentional and there is a reasonable cause.

Gaurav Rajesh Desai 7. On merits, the ld. AR during the course of hearing primarily made submissions with regard to the valuation of the DVO being not correct. In this regard the ld. AR submitted that the impugned land consisting of 2 plots is under lease for 50 & 75 years on which the lessee has constructed a school. The ld. AR further submitted that the original owner was suffering from cancer and therefore made a distress sale to the assessee and two others for a consideration of Rs. 1,00,00,000/- and that the assessee has not obtained the possession of the land. The ld AR argued that the DVO while making the valuation has not considered these facts. Further the ld. AR drew our attention to the valuation report of the DVO (page 31 of Paper Book) to submit that the sale instances of four properties considered by the DVO are not the correct comparable. In support of the said contention, the ld. AR submitted that the plot area in the sale instances are much smaller as compared to the area of the impugned property and that area of the land has significant impact on the price which is a key factor ignored by the DVO. The ld. AR further argued that two of the sale instances pertain to sale of TDR and not sale of land and that one of the sale instances pertain to a free-hold land. Therefore it is argued by the ld AR that the very basis on which the DVO has arrived at the valuation is not correct. The ld. AR submitted a Paper Book containing additional evidence substantiating that the sale instances considered by the DVO are not the correct comparables. The ld. AR drew our attention to the relevant observations of DVO where the value per sqm is arrived at Rs.4998 to submit that the details of how that said rate is at is not clearly stated except the general observation that various factors have been taken into consideration. Therefore, the ld. AR argued that the valuation done by the DVO is flawed and cannot be considered as a basis of making addition under section 56(2)(vii)(b) of the Act. The ld AR further submitted that the additional evidences now submitted include the interim injunction given by the Hon'ble Bombay High Court in favour of the lessee with regard to the possession of the impugned land.

Gaurav Rajesh Desai The ld. AR also submitted the death certificate and the medical report are also submitted as additional evidence in order to support the claim that the sale made by the original owner is a distress sale. The ld AR argued that the additional evidences go to the root of the issue contented in the appeal i.e. the DVO's valuation being incorrect and accordingly prayed for the admission of the same.

“3. Valuation of the Property - DVO's Role and Accuracy For the Revenue: The addition of ₹50,96,667 is supported by a thorough valuation process. Initially, the stamp duty value of the property was astronomically high at ₹6.87 crore. Recognizing that this value might not reflect the reality (due to the lease and other issues), the AO invoked Section 142A and referred the matter to the Departmental Valuation Officer (DVO). This was done upon the assessee's own request/objection to using the stamp value, evidencing that the AO followed due process to ensure fairness (as later commended by the CIT(A)). The DVO, after inspecting the site and considering all factors, determined the fair market value (FMV) as ₹2,52,90,000. This is less than 40% of the stamp value a drastic downward revision acknowledging factors like the encumbrance of the old lease, the unauthorized construction by the lessee (a school building), potential litigation impact, etc. In effect, the DVO gave substantial benefit to the assessee by lowering the benchmark from ₹6.87 cr to ₹2.53 cr. The AO then strictly followed the mandate of section 56(2)(vii)(b), substituting this FMV in place of stamp value and taxing the difference over purchase price, allocating ₹50.96 lakh to the assessee (1/3rd share).

It is important to note that section 56(2)(vii)(b), by reference to section 50C (via its Explanation and earlier proviso), allows the use of DVO valuation in place of stamp value where an assessee disputes the stamp value. The AO's approach was therefore not only fair but also fully compliant with the scheme of the law (section 50C(2)/(3) and corresponding rules for 56(2)(vii)(b)). The assessee was given opportunity to be heard by the DVO as well, as per standard procedure (though he may not have availed it actively). The CIT(A) explicitly found that "from the DVO's report itself it is evident that he was well aware of the nature and character of the land in question". This implies the DVO considered the leasehold status, the low rent, the litigation, and any Gaurav Rajesh Desai other locational disadvantages in arriving at ₹2.53 cr. The assertion in the Grounds that the DVO "failed to refer to the nature and character of land correctly" is unfounded it is contradicted by CIT(A)'s perusal of the report. The DVO is a specialist, and there is no evidence of any mistake or oversight in his valuation. On the contrary, the huge reduction from stamp authority's figure suggests a careful consideration of encumbrances.

Assessee's contention: The assessee's only counter to the DVO's valuation has been to submit an advocate's report contending an even lower value (essentially arguing that the property is valueless to the purchasers at present due to the lessee's possession and legal dispute). With respect, an uncertified advocate's valuation cannot override the statutory DVO's report. The advocate is not a registered valuer, and likely his report is a partisan estimate. The Department, by contrast, followed the statutorily prescribed route: valuation by a competent technical expert (an engineer of the Income Tax Department valuation cell). The Supreme Court in numerous cases has upheld reliance on official valuations when mandated by statute, as long as the process is fair. For instance, in the context of wealth tax or capital gains, courts have accepted Valuation Officer's reports unless shown to be perverse. Here, the assessee has not demonstrated any specific error in the DVO's methodology- he merely alleges the DVO did not consider X or Y, which the record disproves. The CIT(A) rightly pointed out that the DVO "after examining all the factors... assessed the market value" and that such valuation "can't be questioned" under these facts.

It is also notable that even after the DVO's generous scaling down, the FMV (22.529 cr) is still 2.5 times the purchase price. This strongly indicates that the purchase price was abnormally low. While the assessee argues that "our advantage is zero at present" because of the lessee, that is a subjective assessment. The fact remains the assessee acquired a valuable reversionary interest for example, the lessee might be induced to surrender the lease for a price, or if the lease term expires or is breached, the land's full value can be realized by the assessee. The market clearly prices in those future prospects. The existence of civil litigation is a temporary cloud, but not a permanent damper on value; indeed, the purchasers presumably bought the land hoping to eventually derive benefit (which is why they paid ₹1 crore). Thus, the argument of "zero value" is not credible. The ₹2.53 crore figure strikes a balance it is the fair market value accounting for all encumbrances as of the transaction date.

Legal backing for DVO reliance: Section 142A authorizes the AO to get a valuation for any purpose of the Act, which includes determining income under 56(2)(vii). The AO exercised this power judiciously. Courts have often stressed that to adopt stamp value (or any notional value) without giving the taxpayer a chance to contest can be harsh; hence reference to DVO is the remedy to ensure only a realistic value is used.

Gaurav Rajesh Desai This principle was enunciated in cases like Sunil Kumar Agarwal v. CIT (Calcutta High Court, 372 ITR 83) and later echoed by other High Courts - the AO must address the taxpayer's grievance on valuation by seeking expert valuation, which was faithfully done here. Having availed that process, the assessee cannot now impugn the DVO's conclusion with mere self-serving statements. No material was produced to CIT(A) (nor before this Hon'ble Tribunal so far) to show the DVO's valuation is excessive. The burden is on the assessee to prove the DVO wrong, which has not been discharged. In absence of any cogent contradictory evidence, the DVO's report is best evidence of FMV. Therefore, the addition of ₹50.96 lakh which is arithmetically derived from that report is correct.

It is also worth highlighting that, under section 56(2)(vii)(b), the entire difference is taxable, not just some portion. The law did not provide for a 5% or 10% tolerance band in AY 2015-16 (such minor relief came only from AY 2019-20 via section 56(2)(x) amendments). At that time, if the difference exceeded ₹50,000, the full difference was taxable. Here the difference is massive. The AO and CIT(A) actually exercised a lot of fairness by using ₹2.53 cr (DVO value) instead of ₹6.87 cr (stamp value), which dramatically reduced the taxable amount from what it could have been. The assessee has thus no grounds to complain; he has benefited from the statutory mechanism to reduce a potentially severe addition.

Assessee's "double taxation"/state subject argument: The assessee, in his submissions, mused that taxing the difference in the hands of both transferor and transferee based on stamp value is unfair, especially since stamp duty is a State subject with varying circle rates. We submit that these broad arguments cannot override the Act's explicit provisions. Parliament is competent to enact provisions to curb tax evasion via undervaluation of property transactions, even if it means relying on State-determined values. The device of using stamp duty valuation has been upheld in context of section 50C by multiple High Courts as a reasonable anti-avoidance measure. While stamp values may not be perfect, the law provides the safety valve of DVO reference, which was utilized here to arrive at a more accurate figure. Moreover, potential "double taxation" of the same differential in hands of buyer and seller is not a bar to the legislative design. The seller is taxed on capital gains (a different income) and the buyer on deemed other income conceptually different taxable events, though arising from one transaction. Courts have not struck down these provisions on that ground. The judiciary's general stance is that these provisions create a tax on unaccounted income flowing through under-valued transactions, and unless proven arbitrary or confiscatory, they are valid. In our case, the outcome is far from confiscatory - the assessee still acquired an asset worth ₹2.5 crore for ₹1 crore, and is simply being taxed on the real enrichment of ₹51 lakh (his one-third share). Even after paying tax on ₹51 lakh, the assessee would retain a significant post-tax benefit. This aligns with Gaurav Rajesh Desai the legislative intent to tax "gifts" or concessions in property transactions between unrelated parties. In conclusion, the valuation done is reliable and authoritative. The DVO's fair market value determination should be accepted over the assessee's unsubstantiated lower estimate. The addition based on that value is correctly quantified. There is no overreach or overvaluation by the Department on the contrary, the Department ensured the valuation reflects reality. The assessee's rights to dispute the stamp value were fully respected and the final adopted value is actually favorable to him compared to the original. Thus, the quantum of addition is proper.”

9. We heard the parties and perused the material on record. For the purpose of adjudication, we will only consider the issue of DVO's valuation not being correct. To recapitulate the facts, the assessee along with two other persons purchased a land containing 2 plots which is under lease for 50/75 years for a consideration of Rs.1,00,00,000/-. Since the stamp duty was much higher, the AO issued a show cause notice as to why the provisions of section 56(2)(vii)(b) should not be applied. The assessee objected to the stamp duty value considered by the AO stating that the owner has made a distress sale and that the assessee has not obtained the possession of the land due to the fact that the lessee who has built a school on the impugned land has filed case in the Hon'ble High Court against handing over the possession. The assessee accordingly requested the AO to refer the valuation of the land to DVO. The assessee submitted all the relevant details before the DVO and the DVO gave the repost arriving at the valuation at Rs. Rs. 2,52,19,000/-. The AO accordingly made the addition under section 56(2)(vii)(b) to the extent of assessee's share. The contentions of the assessee with regard to the valuation report is two fold. One the sale instances considered are not the correct comparables and the second that the DVO has not given proper discount towards the property being encumbered. In support of the first contention the ld AR submitted additional evidences containing the sale deed of the instances considered by the AO. Since the additional evidences now produced goes to the root of the issue of sale instances considered by Gaurav Rajesh Desai the DVO not being correct, for a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. The reasons as submitted by the ld AR for the sale instances considered are not correct comparables are that – a) The land size in the sale instances is much smaller than the size of the impugned land that the size of the land impacts the rate per sqm. b) Two of the sale instances are sale of TDR and not land c) One of the sale instances is a free hold land and not lease hold as in assessee's case d) In one of the sale instances the encumbrance is of different nature

B. However, for the last more than 22 years, the Confirming party was not in possession of any portion of the Said Property; and the same was in absolute and uninterrupted use, possession and occupation of Haldyn Glass Ltd., (hereinafter, for the sake of brevity, referred to as “Haldyan”), along with the adjoining properties belonging to Haldyan, bearing CIT Nos. 213A/1B, 218 abd 218/1 to 29, of revenue village Goregaon, shown by green wash on the said plan being Annexure “A” hereto (hereinafter referred to as the “Haldyn Property”) Haldyn was, for the last more than 22 years, also in possession of other two adjacent plots bearing CTS Nos. 216 and 217 of revenue village Goregaon, which were shown by pink and yellow wash respectively on the said plan being Annexure “A” hereto (hereinafter referred to as “Properties 216 & 217”). Haldyn was in possession of the Haldyn Property, the Said Property and Properties 216 & 217, as on composite property, which is shown by blue outline on the plan being Annexure “A” hereto. The Said Property has no direct access from any public road; and the access thereto is only through the Haldyn Property and Properties 216 & 217 only.

Gaurav Rajesh Desai In a situation in which the assessee has no choice but to sell the land to a particular person and take on board a consenting party which is in possession and control of the said property the assessee has no choice but to accept whatever is being offered to him in consideration of parting with the legal title over said property. The entire basis of valuation of evaluation adopted by the DVO is devoid of any legally sustainable foundation in as much as there is nothing sacrosanct about discounting at the rate of 50% for arriving at fair market value. Given these peculiar facts of the case the sale consideration on which the transaction is actually taken place should be accepted, being an arms length transaction on these peculiar facts, as the fair market value of the said property as on the date of the transaction. In view of these discussions bearing in mind entirety of the case we deem it fit and proper to direct the Assessing Officer to adopt the deed sale consideration at Rs. 50 lac and compute in long term capital gains on that basis. Order accordingly. Ground no 1 and 2 are thus allowed in the terms indicated above.”